2018 (8) TMI 662 - AT - Income Tax

Nature of sale of land - adventure in the nature of trade or not - Liable to be taxed as capital gain or as business profit - Exemption u/s 54F - genuineness of expenditure on land development expenditure - Held that - It is not in dispute that assessee purchased the land in his own name which is proved by purchase deed executed in his favour. There were no material available on record to show that land was acquired as stock in trade. It was a solitary transaction entered into by the assessee with an intention of earning profit on accretion. The assessee is not a dealer in land. The assessee entered into the solitary transaction of purchase of land which could not be treated as subject matter of trading. The land was not acquired for the purpose of dealing in land. The length of period of ownership was from 1995-97 to 2005 which speaks that assessee purchased the property to make investment in capital asset. The very fact that each co-owner separately purchases their lands but only combined for the purpose of sale, does not show any element of carrying out any business for joint profits. The expenditure on acquisition of land, its improvements were separately incurred by respective owners and sale proceeds were also separately received by respective co-owners, therefore, it is a case of capital gains only and assessee is entitled for exemption under section 54F of the I.T. Act. Order of CIT(A) sustained - Decided against the revenue.

Summary

Issues Involved:
1. Whether the sale of land by the assessee was of capital assets resulting in capital gains or business profits.
2. Whether the assessee is entitled to the benefit of Section 54F of the Income Tax Act, 1961.
3. Whether the disallowance of ?77,04,873/- on account of alleged bogus land development expenditure was justified.

Detailed Analysis:

Issue 1: Nature of Sale Proceeds (Capital Gains vs. Business Profits)

The primary contention revolves around whether the sale of land by the assessee should be treated as capital gains or business profits. The Assessing Officer (AO) considered the transaction as an adventure in the nature of trade, thus taxable under "Profits and Gains of Business or Profession". The AO's decision was based on the argument that the assessee, being a Director in PCL (a company engaged in real estate), had a business motive behind the sale.

However, the assessee contended that the land was purchased as a capital asset and held as an investment for over 10 years. The land was not treated as stock-in-trade, and there was no intention of trading in land. The assessee cited several judicial precedents, including the Supreme Court's ruling in Janaki Ram Bahadur Ram v. CIT, which emphasized that the mere enhancement of value through realization does not constitute a business transaction.

The Ld. CIT(A) agreed with the assessee, highlighting that the transaction was a solitary one, the land was held for a substantial period, and the steps taken to enhance its value were merely to realize a better price, not indicative of a business activity. The CIT(A) also noted that the land was shown as an investment in the assessee's records.

Issue 2: Benefit of Section 54F

Since the transaction was treated as capital gains, the assessee claimed the benefit of Section 54F of the Income Tax Act, which allows for exemption on long-term capital gains if the sale proceeds are invested in a residential property. The AO denied this benefit, aligning with his view that the income was business profit.

The CIT(A), having concluded that the sale was of a capital asset, directed the AO to allow the benefit of Section 54F. The CIT(A) emphasized that the assessee's intention was to invest the proceeds in another residential property, which aligns with the conditions of Section 54F.

Issue 3: Disallowance of Land Development Expenditure

The AO disallowed ?77,04,873/- claimed as land development expenditure, labeling it as bogus. This disallowance was based on a similar finding in the case of PCL, where such expenses were deemed non-genuine.

The CIT(A) overturned this disallowance, noting that in the case of PCL, the addition for land development expenses was deleted. The CIT(A) found no independent findings or evidence from the AO to substantiate the claim of bogus expenditure in the assessee's case. Consequently, the CIT(A) directed the AO to allow the deduction of the development expenses while computing the capital gains.

Conclusion:

The ITAT upheld the CIT(A)'s findings in favor of the assessee on all issues. The tribunal agreed that the sale of land was a transaction of a capital asset, thus resulting in capital gains. Consequently, the assessee was entitled to the benefit of Section 54F. Additionally, the tribunal found no basis for the disallowance of the land development expenditure, as the AO failed to provide independent evidence to support the claim of it being bogus. Both departmental appeals were dismissed.